Lack of visibility and geopolitical noise

European equities: Healthcare and Utilities, the only sectors posting gains…

Automobile and semiconductors were hit the hardest during the period amid trade tensions while Healthcare and Utilities were the only sectors posting gains. Financials also dropped as bond yields hit new lows, which weighed on the sector’s earnings outlook. Overall, continued weak global economic data and the lack of a specific date for the resumption of US-China trade talks are clouding earnings visibility and weighing on risk appetite as well in this part of the world. This factor also results in tight relative valuations among quality stocks compared to value stocks.

We are maintaining our global positioning in Europe, and closely monitoring the German Bund, as a reliable fear indicator in the markets. We are also watching the current style dispersions/tensions, as they could result in a reversal after what looks like an overshoot from the markets.

US equities: defensive sectors fared better than the broader market

Most investors were hoping for a successful conclusion to the trade negotiations between China and the US and/or to the “Brexit” discussions. This was not the case however.

The steep rise in the global stock markets since the beginning of the year came to an abrupt end in May. Most investors were expecting or hoping that a successful conclusion to the trade negotiations between China and the US was imminent, but were disappointed as the trade talks collapsed completely. President Trump even increased tariffs on another USD 200bn of goods, while putting Chinese bellwether company Huawei on a black list, under which no company is allowed to ship products with more than 25% of US content to Huawei or its affiliated companies. On a more global scale, the world economy could be significantly impacted if the trade conflict escalates further. Bond yields therefore eased almost across the board as investors flew to safe heavens.

In the US, most defensive sectors fared better than the broader market, while cyclicals (CDI, industrials) lagged. in this context, our overweight positioning in Healthcare companies was profitable and our underweight exposure to Communication services weighed slightly on our performance.

US small caps have underperformed over the past few months, which would indicate the end of the cycle.

We are maintaining our cautious/neutral stance in our US sector allocation, with an overweight in healthcare, as this sector should be less sensitive to any escalation in the trade war. We are monitoring this position closely as risks may arise from the national debate regarding social security programmes. Our global positioning in the US remains unchanged, but we are monitoring communication services and tech stocks, in order to reinvest if a buying opportunity arises.

Emerging equities: trade talks called off

Emerging market equities posted their worst month so far in 2019 and underperformed developed markets.

Asia was hit the hardest, with China impacted by trade talks with the US breaking down and the imposition of additional tariffs, along with the ban on firms such as Huawei, while Korea and Taiwan came under pressure due the heavy tech sector weighting in both countries’ benchmarks and their sensitivity to global trade.

ASEAN countries and India acted as safe havens, India supported by the victory of the ruling BJP in the general elections, which ensures policy continuity. EEMEA and Latam also came under pressure, but to a lesser extent.

Towards the end of the month, Mexico became the latest casualty of the ongoing trade tensions, with Donald Trump slapping a 5% tariff on all Mexican exports to the US in order to control illegal immigration.

We cut our Chinese exposure to neutral, selling chiefly ADR/companies quoted in the US and partially reinvested the proceeds in India. Our view on Indian companies remains neutral however, considering the recent outperformance of this market. We are maintaining our overweight positioning in Brazil in order to benefit from the current economic recovery plans.